US casinos play Russian roulette in Macau

Pulling in four times as much annual revenue as Las Vegas and Atlantic City combined, Macau is the world’s undisputed gambling hub, but with big profits comes big risks in the form of organized crime and corruption

By Hannah Dreier / AP, LAS VEGAS, Nevada

Mon, Jul 08, 2013 - Page 9

Most people still think the US gambling industry is anchored in Las Vegas, Nevada, with its booming Strip and 24/7 action, a place where years of alluring marketing campaigns have helped scrub away the taint of past corruption.

Yet in just a decade, the center of gambling has migrated to the other side of the world, settling in a tiny Chinese territory an hour’s ferry ride from Hong Kong. The gambling mecca of Macau now handles more wagers than all US-based commercial casinos put together and many of those bets end up swelling the balance sheets of US corporations.

Yet as US gambling companies have remade Macau, Macau has also remade them.

These companies have been hit with allegations of improper conduct, prompting investigations and serious questions about how closely US authorities are watching corporations’ overseas dealings.

The quest for Asian riches is changing Las Vegas as well. Casino bosses are tweaking their flagship casinos to look and operate more like Macau-style properties. As they succeed, hints of organized crime are returning to Sin City, this time in the form of Chinese gangs.

However, the moguls are undeterred, increasing their investment at every opportunity.

A few hours’ flight from half the world’s population, Macau is the only place in China where gambling is legal. Each month, 2.5 million tourists flood the glitzy boom territory half the size of Manhattan to try their luck in neon-drenched casinos. Most of them are nouveau-riche Chinese who sip tea and chain-smoke as they play at baccarat, a fast-moving game where gamblers are dealt two cards and predict whether they will beat the banker.

The former Portuguese colony has long been known for its gambling, but used to offer a seedier experience, with small-time gambling dens crowding up against textile factories and gangs, prostitutes and money launderers operating openly in the cobblestone streets.

When China reassumed sovereignty of Macau from Portugal in 1999 and abolished a longstanding gambling monopoly, US companies rushed in to try their luck. Since then, annual revenue in the former backwater has grown tenfold, stacking up to US$38 billion, four times that of Las Vegas and Atlantic City combined.

“It was a swamp,” Las Vegas Sands chief executive Sheldon Adelson said as he looked back on his early venture in an obscure city where Chinese officials envisioned conventions and resorts. “Everybody thought that I was crazy.”

Nevertheless, he and the two US competitors that tried their luck there succeeded spectacularly. Adelson’s first casino-opening there caused a stampede that ripped doors off their hinges. Now operating four booming casinos in Macau, he described Sands as “an Asian company” with a presence in the US. He makes far more in China — with a culture in which notions of luck and fate play integral roles — than in Las Vegas.

“This industry is supply driven, like the movie Field of Dreams: ‘Build it and they will come,’” he said. “I believe that.”

If Adelson’s words and jack-o’-lantern smile suggest all is right in the globalized casino world, consider where he made these statements: on the witness stand in a Vegas courtroom this spring, defending his company against one of his former Macau consultants.

A jury in May ruled against Adelson, awarding the consultant US$70 million for helping Sands secure a lucrative gambling license in Macau. Sands immediately appealed, but the lawsuit may be the least of Adelson’s worries. His firm is also accused of making improper payments to a Macau lawmaker and collaborating with the Chinese mafia. The US Department of Justice and the US Securities and Exchange Commission are investigating. The company says it has done nothing wrong.

LEGAL TROUBLE

It is not just Sands facing legal and regulatory troubles connected with Macau. Two of the other three major US gambling enterprises are too: Wynn Resorts Ltd and MGM Resorts International. Sands and Wynn are facing related lawsuits from shareholders who claim Macau mismanagement has damaged the companies. Wynn is being investigated by the US Department of Justice and the commission over a US$135 million donation to the University of Macau Development Foundation in 2011. Wynn co-founder Kazuo Okada characterized the donation as “suspicious” last year in a letter to the commission. He said that the foundation’s lead trustee is also a member of the Macau government and that the donation coincided with Wynn’s request for land to develop a third casino.

“I am at a complete loss as to the business justification for the donation, other than that it was an attempt to curry favor with those that have ultimate authority for issuing gaming licenses,” said Okada, who is now the subject of a Justice Department investigation himself for possible bribery in the Philippines, and has fallen out with his former Wynn colleagues.

Okada denies wrongdoing.

If his claim about the donation is true, the Wynn payment could violate the US’ Foreign Corrupt Practices Act, a law that bars US companies from paying off officials to win business overseas. Wynn says it acted properly and had no need to buy off authorities. In a separate investigation, Nevada regulators found no wrongdoing.

MGM got into trouble with New Jersey regulators when it opened a Macau casino with Pansy Ho (何超瓊), the daughter of gambling tycoon Stanley Ho (何鴻燊), who is allegedly linked to Chinese gangs. The state found the partnership “unsuitable” in a 2010 report and forced MGM to sell its stake in an Atlantic City casino. MGM denied that there was anything inappropriate about the relationship, began the process of selling its stake and did not cut ties with Macau.

Two years later, MGM chief executive Jim Murren stands by that choice.

“The Macau market is now larger than the entire US gaming market. Unfortunately for Atlantic City, it’s gone the other way. It’s smaller now than when we entered it. The fortunes of the two couldn’t be more different,” he said.

Last winter, New Jersey agreed to consider MGM’s application for a renewed license.

The Sands inquiries stem from a pending wrongful termination case brought by former Sands executive Steve Jacobs in 2010. Jacobs claims that Sands’ China subsidiary did business with known gangsters, tacitly condoned prostitution and made inappropriate payments to an attorney who was also a Macau lawmaker. Jacobs claims Sands paid the lawmaker to help settle various regulatory issues in Sands’ favor.

Sands has denied all claims, but recently said in a commission filing that an internal audit had found possible breaches of a section of the Foreign Corrupt Practices Act that requires public companies to file proper financial statements and maintain a system of internal controls. In April, Sands’ auditor declined to stand for re-election.

Justice Department spokesman Michael Passman declined to comment on the probe. Sands says it is cooperating with federal prosecutors. Company spokesman Ron Reese said the firm’s dealings in Macau attract more scrutiny because it is the world’s largest gambling market, but Sands is diligent wherever it operates.

Sands opened for business in Macau in 2004, at the beginning of a massive boom in China’s economy that has lifted the incomes of hundreds of millions of people, allowing them to afford upscale pleasures like gambling in casinos.

Today, the former backwater is in the midst of one of the greatest gambling booms the world has ever seen. To rival the money it takes in, Las Vegas would have to attract six times more gamblers each year than it does now — essentially every adult in the US. Wynn Resorts now makes nearly three-quarters of its revenue in Macau. Sands, which owns the Venetian and Palazzo in Las Vegas, earns two-thirds of its revenue there.

However, like early Las Vegas, Macau has a long history of ties to crime syndicates, in this case, secretive brotherhoods called triads that first formed on the mainland more than a century ago. Machine-gun shoot-outs, bombings and even assassinations of government officials were commonplace during magnate Stanley Ho’s four-decade monopoly of gambling. In the late 1990s, a police official tried to reassure visitors by remarking that Macau had “professional killers who don’t miss their targets.”

The history and regulations governing the enclave continue to make it tricky for modern casinos to avoid gangs, illegal money transfers and, at least, the appearance of bribery.

Businesses operating there can expect allegations against them, true or not, said Bill Weidner, who was president of Sands until 2009.

“Macau is their country, not ours, and it’s their system, not ours, and it operates differently than ours. It’s not better or worse, just different,” he said.

Local policies are partly to blame. China bans its citizens from transferring more than US$50,000 off the mainland each year, a pittance at many high roller tables and nowhere near enough to account for the towers of chips that change hands in Macau. It also bans casinos from pursuing gambling debts. Another is the lack of reliable credit risk information in China, which makes it hard for casinos to figure out whom they should lend to.

Partly as a result, a thriving junket system has sprung up, with supercharged travel agents whisking VIPs to the gambling tables, lending them money and then settling up on the mainland.

Junket operators often assume management of a casino’s private VIP room. Casinos provide the facilities, dealers and chips in return for a cut of the profits. Baccarat played in VIP rooms accounts for two-thirds of Macau’s annual gambling revenue.

The informal banking and debt collection system provides a veil and an impetus for criminal activity, according to experts and diplomatic cables.

Junkets “allegedly work closely with organized crime groups in mainland China to identify customers and collect debts’” and “work directly with Macau casinos to buy gaming chips at discounted rates, allowing players to avoid identification,’’ according to a 2009 memo apparently from the US consulate in Hong Kong posted by WikiLeaks.

While many of the more than 200 junket operators active in Macau are law-abiding, some have documented ties to organized crime.

The case of Cheung Chi-tai (張治太), a major investor in the publicly traded junket operator Neptune Group, is a prime example.

TRIAD VIOLENCE

In 2011, a Hong Kong appeals court judgement said Cheung was a “triad leader” who ordered the death of a casino dealer at Sands Macau. He had previously been identified as high-ranking gang figure in a 1992 US Senate report on Asian organized crime.

A witness testified that Cheung was “the person in charge” of one of the VIP rooms at the Sands Macau, the oldest of the Adelson’s Macau casinos.

He was not charged in the case, but a subordinate was sentenced for conspiracy to commit murder.

Operating off the books, junkets pay out winnings in Hong Kong dollars, widely accepted in Macau, which players can then move to another location. As a result, Macau is seen as a conduit for money flowing out of China, with wealthy individuals and corrupt officials suspected of transferring funds abroad.

The enclave has seen a spate of killings and kidnappings associated with debt collection, including one grisly case last year in which two men were stabbed to death in their four-star hotel room, discovered by a friend who had come to lend them the money they needed.

Las Vegas is also beginning to see occasional outbursts of triad violence.

In March, 26-year-old Bai Xiaoye began serving a life term for stabbing a man to death in a crowded karaoke bar near the Strip. Prosecutors said Bai was a martial-arts trained enforcer for Taiwan-based triad the Bamboo Union, sent to collect a US$10,000 gambling debt.

Last year, the US Treasury’s Financial Crimes Enforcement Network warned casinos to monitor junket operators and report suspicious activity. The warning followed media reports that Sands allowed a man named as a triad member in a congressional report to move a US$100,000 gambling credit from Las Vegas to one of its Macau casinos.

Today, US companies are tweaking their flagship Las Vegas casinos to look and operate more like Macau-style properties. The biggest casinos have imported Asian pop sensations, Chinese delicacies and baccarat, now Nevada’s biggest moneymaker. They have outfitted their hallways in red, a lucky color in Asian culture and set up Macau-style VIP rooms that employ junket operators catering to high-rollers.

Asian visitors now account for 9 percent of tourists to Las Vegas, up from 2 percent in 2008. The Strip is also preparing to welcome its first Asian-owned casino: a multibillion-dollar Chinese-themed extravaganza called Resorts World, complete with pandas and pagodas.

One reason casino bosses are dreaming up ways to lure Macau customers to Las Vegas is that Nevada imposes one-fifth of China’s 39 percent tax on winnings.

“They can make a lot more money from a big gambler here,” said David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas.

Unlike some other states, Nevada allows junket operators to work in casinos without the full suitability checks required for key employees. Some Hong Kong operators licensed in Nevada have been found unsuitable by other jurisdictions, including Singapore.

“The reason why we don’t do a full giant investigation on them is that they have no control over the casino operations; they are basically travel agents and hosts,” Nevada Gaming Control Board chairman A.G. Burnett said.

If another jurisdiction finds fault with a junket operator licensed in Nevada, state regulators will simply ask the operator to submit to a suitability workup, which is tantamount to telling them to get out, Burnett said.

Still, regulators are not blind to the link between junkets and triads.

At a hearing before a congressional advisory panel last month, Burnett said it is “common knowledge that the operation of VIP rooms in Macau casinos had long been dominated by Asian organized crime.” Steve Vickers, who spent 18 years in the Royal Hong Kong Police Force and commanded its criminal intelligence bureau, believes that nearly all junkets that cater to Chinese tourists collaborate with organized crime.

“You won’t find the triad names listed as the junket operators, but they are behind it, because who is it that can reach into China and enforce the debts, move the money? Only one kind of person can do that,” said Vickers, who now runs a consulting company.

REGULATORS VS CASINOS

In the 1980s, Nevada State regulations, along with an FBI crackdown, helped push out the mob bosses who had taken refuge in the gambling world and usher in the industry’s modern corporate era.

Today, US states can impose fines or revoke licenses if any US companies are found to have acted improperly in Macau. However, except for rare instances like New Jersey’s action against MGM, regulators have so far refrained from public action, preferring to wait until federal probes are complete.

Burnett said that does not mean regulators are sitting idle.

“A lot of what goes on is dialogue between the board and the companies that the public doesn’t necessarily see,” he said.

Conventional wisdom is that no US companies will lose their licenses over the allegations, even if proven true. At worst, they could get fined, said Michael Paladino, an analyst at the credit ratings agency Fitch.

“They can handle that,” he said, adding that the largest fine under the act imposed to date — on German engineering giant Siemens A.G. for bribery — amounted to about US$1 billion, less than one month’s revenue for Sands.

The balance of power between casinos and regulators has shifted as gambling companies have achieved their own version of outsourcing, according to Nelson Rose, a professor at Whittier Law School in California who writes a blog called Gambling and the Law.

“Macau forced the casinos to see that they could become like other large US corporations: Set up their plants and operations in other nations, and make far more than they can being stuck just in Las Vegas,” he said, speaking from his hotel room near Macau University, where he teaches a summer course.

Sands, Wynn and MGM have structured their China operations as subsidiaries that could eventually be spun off entirely.

In any case, public officials are not exactly clamoring for investigations. Among the ranks of the unconcerned is former Las Vegas mayor Oscar Goodman, a one-time lawyer for mob figures. Sitting on an overstuffed green leather couch his living room, Goodman, whose wife is now mayor, said he does not worry about Macau because Americans are not paying attention to the murky allegations there.

“You ask people who Sheldon Adelson is, if 10 out of 50 recognize the name, I’d be surprised. If they associated him with the Venetian and the Palazzo, I’d be even more surprised. People are busy,” he said.

Of course, within the industry, Adelson is an object of fascination. As the Sands chief executive appeared in court this spring, a former rival, Phil Satre, who headed Harrah’s Entertainment, followed the coverage from his home in Reno, another city in Nevada. Harrah’s, the US’ largest casinos company when Satre stepped down in the early 2000s, was later renamed Caesars Entertainment Corporation.

While Wynn, MGM and Sands have taken off, Caesars, the industry’s fourth major player, has been left behind. Caesars did not apply for the finite number of gambling licenses in Macau in the early 2000s for fear of upsetting domestic regulators.

At that time, the US gambling industry had at last gained a legitimacy and mundane familiarity that had been unthinkable a generation ago, Satre said. He said he did not think US regulators would tolerate any hint of ties to criminal activity in Asia.

“There are some things that still have to play out, but when I look back and think about the opportunity to go back in Macau, I’d probably take a different posture,” Satre said.